Icahn Sets the Earth Trembling Under Netflix

Netflix surged on the news that Carl Icahn has set his sights on reversing the company's fortunes. The breakup artist bought 5.5 million shares for a 10 percent stake. Icahn no doubt will work his magic to boost the Netflix's value and then push for a breakup or sale. "I don't think he has figured out a novel way to make money off of movie streaming," said consultant Peter S. Cohan.

By Erika Morphy
11/01/12 1:14 PM PT

Billionaire investor and activist shareholder Carl Icahn has acquired a 10 percent stake in Netflix, according to a Wednesday filing with the Securities and Exchange Commission. The value of the 5.5 million shares is about US$169 million.

Icahn Capital believes that Netflix is undervalued and positioned for expansion both in the U.S. and overseas, according to the filing.

Up-and-Down History

It is easy to see why Icahn would say Netflix is undervalued; if ever there were a company whose fortunes have fluctuated wildly, it is Netflix.

For its third quarter earnings it posted US$8 million in net income, compared with $62 million in the third quarter a year earlier. It grew to 25.1 million domestic streaming members in the quarter, on a guidance range of 24.9-25.7 million. Its figures for Q2, however, were downright dismal, with a 91 percent drop year over year to a paltry $6.16 million in net income. For Q4, Netflix's guidance is for its U.S. membership base to increase to 26.4-27.1 million.

Although it made marginal improvements in its operations for Q3, Netflix is still struggling to overcome the missteps it made in 2011 -- namely its substantial price hikes. Furious customers bolted in droves.

The company profusely apologized for the way it introduced the changes and since then has been working to right its ship, even though it kept the higher rates in place.

Possible Breakup

With Carl Icahn involved, Netflix's future path may well include a breakup or sale. Indeed, the filing points to that.

"Netflix may hold significant strategic value for a variety of significantly larger companies that are engaging in more direct competition with one another due to the evolution of the Internet, mobile and traditional industry," it says.

Icahn Capital is considering ways to maximize shareholder value but has reached no conclusion, the filing also notes.

Netflix did not respond to our request to comment for this story.

The Market Reaction

Wall Street is more than OK with such a prospect, it would appear. The company's stock price went up following the announcement by as much as 22 percent, closing at $79.24.

"He didn't acquire a 5.5 million-share stake in Netflix to build the business," he told the E-Commerce Times. "Icahn will do what he tried to do with Clorox and what he successfully did at Motorola, where he pushed to have the company split off its hardware business, which was eventually acquired by Google for $12.5 billion."

Right now, Netflix is operating at close to breakeven, Scherer said.

Whether or not the company agrees, "it's a good time for a little energy boost. Icahn's move might be the best thing that happened to Netflix investors lately," he said.

Before the Sale

More than likely, though, Icahn won't move to break up or sell off Netflix right away, speculated Peter Cohan of Peter S. Cohan & Associates.

"He will want to boost the value of the company first, so it is at least 50 percent above the value at which he bought in," he told the E-Commerce Times.

Icahn might arrange a merger or try to get a seat on the board or try to push out the CEO, Cohan said -- all moves he has tried before with other companies, oftentimes achieving great success.

"I don't think he has figured out a novel way to make money off of movie streaming," Cohan continued. "What he knows how to do is add value to a company to drive its stock price up. He is very good at that."